iPhone Fits Apple To a "T" (AT&T That Is)

AT&T reports earnings Tuesday and while the company's NYSE trading symbol is "T," in this case, "t" stands for telegraph, as in telegraphing what to expect from Apple which reports on Wednesday. In AT&T's case, the Street is looking for 67 cents on $29.61 billion in revenue.

Rather than looking at the company's entire financial picture, I want to focus on the wireless sector since I'm really more interested in what all this could mean for Apple a day later. UBS projects AT&T's wireless revenue jumping over 12% to just shy of $9.5 billion. It'll be interesting to see what, if anything, the company discloses about iPhone sales, and whether AT&T breaks out a figure of some kind. Piper Jaffray estimated well over 500,000 iPhones sold during those two days of the quarter that counted toward this week's results. Some firms, including Piper, suggested the number could actually close in on 750,000 units.

No one is looking for massive revenue from a single weekend of sales; but the figures will go a long way toward establishing what, if any, momentum there might be for iPhone. Did Wall Street get it right? Has the hype been overblown? Or has, gasp, iPhone not been hyped enough?

The other interesting thing to follow here: the unusual revenue-sharing arrangement that both AT&T and Apple have entered into. Piper claims that the unique arrangement does indeed exist though the firm also claims it doesn't know the true details of it. Piper estimates that AT&T gives Apple $3 a month during a customer's 24-month contract for every iPhone customer who is already an AT&T customer. For those who made the jump from another carrier because of iPhone, the figure jumps to $11 per month. Not a big needle-mover in 2007 since iPhone debuted at the end of June, but potentially 15 cents a share in additional profit in calendar year '08, and a whopping 58 cents by calendar year '09.

All of that contributed to last week's astonishing news from Piper when the company issued its $205 target for Apple shares. "While it is early to be using '09 numbers, we believe that as '09 comes into focus, investors will start to put numbers around Apple's booked revenue metric," wrote analyst Gene Munster. he estimated $4.82 a share, but that was before he did the math in connection with the revenue sharing arrangement with AT&T. Include that, and he gets $7.31 a share. "Applying a 28x multiple on $7.31 leads to a $205 price target," Munster wrote. He says that 28x multiple is reasonable past performance and future expectations.

But wow, what if Munster is off on the revenue sharing details? He's re-building his target based on something he thinks to be true, but has no confirmation that it actually IS true. The pay-off could be huge if he's right, but if he's wrong, well, it could get ugly, though he says not so. "You get a $190 target just with iPhone alone, so a revenue sharing arrangement is really icing on the cake," Munster tells me. Still, even he were "dead wrong" about the agreement, he said it would adjust his EPS expectations by only 10%, and thereby adjust his target by only 10%. But at $180 or $190, he'd still be a Street high.

S&P would rather swing from both sides of the plate, covering its bases in a quirky way with a report this morning: Raising its 52-week target, but downgrading shares. At the same time! Huh?

Analyst Scott Kessler downgraded Apple shares from "buy" to "hold" Monday citing the company's valuation,following Apple hitting yet another all-time high on Friday. But Kessler still likes the company; just not at these levels. In the report, S&P says "We believe Apple's fundamentals remain strong on market-share gains in desktops and laptops, success with digital media players and software and notable inroads in the smart phone category. Based largely on these successes, we believe (Apple) should trade at a greater premium to the P/E-to-growth rate of the S&P 500 Technology Sector, and we are raising our 12-month target price to $155 from $135. However we think our downgrade is warranted by risk-reward considerations, especially with expectations high and (Apple) scheduled to report June-Q results on Wednesday."

And that's why what we get from AT&T, and then Apple the next day, as an early barometer into iPhone's success is so critical. The first two days of iPhone's sales will not a success make. But two days will go a long way toward determining whether this product is on the road to the success so many investors are betting it will be.